Extended limitation and penalty fail where full disclosure covered the returned input stream and exempt manufacture consumed the entire quantity.

Extended limitation under Section 11A could not be invoked where the assessee had fully disclosed the manufacturing process, the supplier arrangement, and the handling of the returned C4 Raffinate stream; on the same facts earlier examined by the department, there was no suppression or misdeclaration, so the demand was time-barred. The exemption was also held to cover the entire quantity received because the input was used in the exempt manufacture and the returned stream was only an inevitable technological residue, not a diversion to an unapproved use. As the duty demand failed both on limitation and on merits, the penalty could not survive.

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Issues: (i) Whether the duty demand could be sustained by invoking the extended period of limitation under Section 11A of the Central Excise Act on the allegation of suppression or misdeclaration in relation to the returned C4 Raffinate stream; (ii) Whether the appellants were entitled to exemption for the entire quantity of C4 Raffinate received and whether the penalty could survive.

Issue (i): Whether the duty demand could be sustained by invoking the extended period of limitation under Section 11A of the Central Excise Act on the allegation of suppression or misdeclaration in relation to the returned C4 Raffinate stream.

Analysis: The same factual basis had earlier been examined by the jurisdictional Assistant Collector, who had treated the returned stream as surplus and permitted its return. The record showed that the appellants had disclosed the manufacturing process, the arrangement with the supplier, and the manner in which the returned stream would be handled. In that background, the later attempt to treat the returned product as different could not support a finding of suppression or misrepresentation. A contrary view on the same facts could at best be pursued within the normal limitation period.

Conclusion: The demand was time-barred and the invocation of the extended period was not justified.

Issue (ii): Whether the appellants were entitled to exemption for the entire quantity of C4 Raffinate received and whether the penalty could survive.

Analysis: The exemption was intended for petroleum gases used in the manufacture of the specified final product, and the evidence showed that the entire quantity received was used for that purpose. The returned stream was an inevitable and technological consequence of the manufacturing process and was not a separate product diverted to an unapproved use. The subsequent governmental notification, which computed consumption by deducting the quantity returned to the supplier, also supported the understanding that the returned stream remained part of the same exemption scheme. On that basis, the demand was unsustainable on merits, and the penalty, being dependent on the demand and alleged misconduct, could not stand.

Conclusion: The appellants remained entitled to the exemption for the entire quantity received, and the penalty was unsustainable.

Final Conclusion: The order confirming duty and penalty was set aside, and the appeal succeeded in full.

Ratio Decidendi: Where the entire duty-free input is used for the exempted manufacture and the returned stream is an inevitable technological residue already disclosed to the department, neither extended limitation nor penal action can be sustained on a later contrary view of the same facts.

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